Let the Games Begin
The Due Diligence Process
Doubt is the vestibule which all must pass before they can enter the temple of wisdom.
—C.C. Colton
For many investors, the search for investment managers—especially hedge fund managers—begins and ends with performance numbers. It is generally accepted that performance is a key metric. Unfortunately, as the SEC states in its required disclosure, past performance is not indicative of future performance.
It is paramount for investors to dig deeply into the inner workings of a manager, in order to understand not only his investment strategy and process but also the core and character of the business operations.
As you examine a hedge fund, the methodology and process you follow should be consistent with each manager. The strategy may differ, but how you review each fund should be quite similar. The process begins with the Investment Committee and works through document and data collection, then the analysis of all. You will then prepare a memo for posterity that describes the firm and your findings. Finally, you will rank the manager against a peer group. These steps will allow you to make a rational judgment and evaluate these funds in a consistent manner.


Figure 7.1 shows a typical flow chart of how a hedge fund works its way through a due diligence process. In this due diligence process we have now screened a database or our referral sources for several possible hedge funds in which to invest. We have given ...

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